Apple Delays Leopard Launch in Favor of an iPhone Summer

According to Reuters, Apple (AAPL) has delayed the release of Mac OS X 10.5 "Leopard" until October. Why? Apple said the delay was because it needed software and resources for the iPhone launch, which it confirmed had passed a set of required certification tests and was on schedule for its June release.

Now that's a tough decision to make, but frankly, I think it was a good one. The iPhone is a brand new product in a new industry for Apple. Trying to release two major products in June would have 1) required two simultaneous marketing and PR campaigns and 2) set the two products up to compete with one another. And while Leopard is important, many industry watchers have predicted Apple will fail in the cell phone market, so Apple needs to execute well to keep the good will in its brand. So better to delay one than to release them both at the same time. But which one?

I believe Apple did the math this way: Of the two products, which one is more important to Apple's bottom line this year? Let's see -- the entire software business at Apple is about $1 billion, and Leopard is a fraction of that, maybe $500 million. On the other hand, iPhone should sell somewhere around 2 to 4 million units this year, at an average price of $550, making its revenue potential about $1 to $2 billion alone, not counting any accessory sell-throughs or revenue sharing with Cingular. Sounds like the right decision to me.

This means that the third and fourth calendar quarters are going to be huge for Apple this year. Assuming the company stays true to form, we should see new iPods in September, and a wealth of new products, including Leopard, iWork, professional apps, and new pro laptops by October. What about the summer? That's easy; summer of 2007 is going to be the Summer of the iPhone.

UPDATE: Apple has released an official statement here, and the Wall Street Journal has a subscription-only article with better formatting and newsier writing here.

Comments

[David Lentz:]

I'm sorry Carl, I'm as big an Apple fan as the next guy, but every stock analyst's take on this that I have seen treats software revenue as being completely divorced from hardware revenue. At Apple, that's simply not the case, with the software and hardware being tightly integrated. That's the reason Apple can maintain the steady stream of repeat sales to its existing customers, because each new iteration of Macintoshes brings BOTH hardware and software advances that are tightly coupled to each other, making the decision to upgrade a no-brainer for anyone who has the coin to do so.

This delay in Leopard not only will impact software revenue -- it won't hurt Tiger sales much, as they are for all practical purposes nonexistent at this point in the OS X sales cycle, having been introduced in spring of 2005 -- but will also further delay a lot of hardware purchases, and there were already plenty of Macintosh owners sitting on the sidelines waiting for the next round of coupled hardware+software to upgrade to a better Mac. And with the popular hype being that Leopard will leave Vista in the dust (which I am sure is true, as Vista doesn't quite match up to Tiger, IMHO), this delay will lose a certain chunk of Windows potential switchers, who will quite reasonably opt for the system that is actually shipping vs one that isn't.

I have yet to see a financial analyst who has also factored in any sort of decline in Macintosh sales due to this delay in Leopard. Put a 10% drop in Mac sales (for lack of a better number) into the mix along with the loss of the software revenue, and then turn the crank.

Plus, there's every indication that iLife'07 and iWork'07 are both tightly integrated with Leopard, requiring some facilities available only in Leopard for optimal operation (or perhaps any operation at all?). So the loss of software revenue might well be closer to ALL of that billion a year in software revenue (assuming it lasted for a year, which thankfully, it will not). If the iPhone comes in at the lower end of expectations (and $500 is a LOT to pay for a phone), then we are looking at a no-growth situation in the revenue department, with a considerable expansion in the expenses side of the ledger, what with a lot more products to support and the massive capital expenditures under way in Cupertino.

I DO expect that Apple will ship Leopard before October, as only complete fools would set themselves a deadline that they didn't know with absolute certainty that they could make. Additionally, the Boot Camp beta that a lot of people are using under Tiger expires Sept 30, so Apple will be forced to either distribute a patch for Tiger to extend the beta, or have Leopard ready by then. My guess (and it's only a guess) is that they're aiming for a Labor Day shipment of Leopard.

It appears to me that the traditional advice of "sell in May and go away" was a bit late this year.

2007 Apr 13 09:00 AM

[David Lentz:]

BTW, I agree that they made the right decision, but it's a bad situation for Apple any way you slice it. The only question is, How bad?

2007 Apr 13 09:01 AM

[Tom B:]

I agree with you. I think your posited 10% impact on CPU sales is reasonable. For my part, i think 10.4.x is great and none of the publicly disclosed 10.5 features draw me in-- but that's just me. This will be a disappointment for a lot of people.

2007 Apr 13 09:40 AM

[David Lentz:]

Having unloaded a good-sized chunk of my AAPL options position (full disclosure: I still retain about 40% of my prior position, just in case I'm wrong -- it's in Ja'09 60 calls, purchased a while back), I can mention my other fear --

Having made a living in the software development business for a long, long time, I can authoritatively state (and this is not news to anyone in the business) that throwing bodies at a late software project almost always makes it later. The only hope Apple has in diverting the Leopard developer resources to work on the iPhone is that they did it a long time ago, and only abandoned any hope of getting back to finish Leopard recently. Based on the reports concerning the amount of progress in the few developer releases of Leopard, my guess is that the developers were reassigned sometime last year, and so there is hope that they might be able to push the iPhone out the door on time and at an acceptable level of quality (which, given the amount of hype slathered onto the iPhone, must equate to "perfect").

It's certainly possible that either the iPhone may yet be delayed, or that it will be shipped with significant flaws rather than delay it. It's also possible that the iPhone may ship as planned, with no problems and ride the hype-strewn escalator to great sales.

It's worthy of note that a delay of this magnitude in a scheduled release of an major software upgrade is unprecedented at Apple. I can't recall it ever happening before.

But all this is just conjecture, and merely serves to illustrate the amount by which the level of uncertainty regarding Apple's near-term success has risen in the past 48 hours. We'll know in about 10 weeks. I'll look at getting back into a larger AAPL options position in late July.

2007 Apr 13 03:13 PM

[Tom B:]

I'm a long-term hold type guy. I anticipate my AAPL will be worth a whole lot more than it is now in a few years. But 2007 could be rough for a few quarters......

2007 Apr 13 05:14 PM